Guru Investment Theses on Qualcomm Inc

Bill Nygren Comments on Qualcomm - Oct 08, 2013

Qualcomm Inc. (QCOM - $67)(QCOM)
Qualcomm is the global leader in wireless technology licensing and mobile device chipsets. Qualcomm has dominant market share in both businesses, and it uses the strong recurring cash flow from its licensing business to reinvest in its chipset business. The company owns intellectual property that defines many of the standards used for 3G and 4G wireless communication, which allows it to collect royalties from handset providers that license these ubiquitous standards. Qualcomm’s licensing business accounts for only a third of the company’s revenue, and it is often underappreciated. However, its licensing business has unusually high profitability and represents close to two-thirds of Qualcomm’s profits. The majority of the world’s mobile handset users are still using older 2G technology, which is not a focus area for Qualcomm, so when these customers upgrade to 3G and 4G, Qualcomm should be well positioned to enjoy robust incremental revenue. The company is also the leading provider of chipsets, which function as the brains for wireless devices. Qualcomm’s industry-leading product breadth and peer-leading R&D investment should drive the company’s chipset growth. We expect Qualcomm to earn over $4.50 per share in a couple of years, and after adjusting for $20/share of cash, this high-quality business is priced at a forward P/E of just 11x.

David Rolfe of Wedgewood Partners Comments on Qualcomm - Jul 19, 2013

Qualcomm (QCOM) was one of our poorest performers during the quarter, declining nearly 9%. In fact the shares in this long held position (at approximately $60), are little changed since reaching t hat level in February 2011. Qualcomm is the leading arms merchant across the entire spectrum of mobile telecommunications and mobile computing. The Snapdragon processor has found its way into 780 devices at more than 85 carriers. The Company reports that the chip is currently being designed into more than 550 future smartphone designs – from low end to high end.

However, their lucrative competitive position is under attack on quite a few fronts. At the high end, concerns over global smartphone saturation has dampened growth expectations. At the ultra competitive low end of the smartphone market (more akin to richer features in more traditional cell phones) where integrated semiconductor chips can sell for as little as $10, the Company has a more difficult time differentiating their chips from other suppliers – most notably Asian supplies.

While the Company maintains a healthy +30% market share in the low end, Mr. Market, in our view, is convinced that a collapse in the Company's average selling price of their chips and chipsets is imminent. The Company has long raged such battles. Over the past ten years, the range of smartphone average selling prices (ASP) has remained relatively steady between $190 and $220. Over the past few ye ars, the Company's royalty rates have been based on smartphone ASP of approximately +$210. We expect a sentiment change on ASP pricing as Apple (a key Qualcomm base band chip client) rolls out a refreshed iPhone lineup later this year. Indeed, while the iPhone 4 and iPhone 4S still sell briskly in the millions of units, these two smartphones are positively geriatric at 21 and 36 months old, respectively. That said, a prospective drop of 10% in ASPs to $195 over the next few years a foregone conclusion as the Company has said as much the question is whether or not volume will pick up, in proportion, to offset the ASP decline.

Qualcomm's licensing revenue is typically a function of device ASPs and volume. We view ASPs as a double edged sword and as a result, over the long er term, should exhibit a flat to slightly declining trajectory. As the value proposition of smartphones become more attractive due to lower prices (compared to smartphone prices just a few years ago), we expect low priced feature phone subscribers will ultimately trade up to low end smartphones with higher ASP's, relative to their feature phone predecessors. In addition, given the highly commoditized nature of low end smartphones, we expect volume will closely offset, if not outpace average selling price declines. On the "high end," we think spectrum innovation from Qualcomm and telecom operators will drive a continued desire by consumers to upgrade devices in order to take advantage of faster, more efficient networks.

In addition, fears of a rejuvenated Intel making inroads in the mobile processor space with their next generation Atom based mobile processors are also weighing on the shares. Lastly, concerns over declining royalty rates at the profitable patent licensing division are quite real down the road. As the smartphone market migrates from 3G/4G, then on to LTE only devices, royalty rates will no doubt decline. Even with declining LTE royalty rates, the Company still possesses best in class IP in apps processing, WiFi integration, power efficiency and smartphone carrier roadmaps to propel robust unit growth. The Company has over 300 devices approved, based on their LTE chips, and over 400 design wins on future LTE devices. Further, the industry research firms of Gartner and Strategy Analytics expect cumulative smartphone unit sales of approximately 5 billion from 2012 to 2016.

In summary, Qualcomm's competitive edge is its unrivaled patent portfolio of 3G and 4G air interface technologies. Around two thirds of the Company's consolidated operating profits are generated by licensing this technology to electronics manufacturers, most notably feature phones and smartphone OEMs, which seek to include cellular equipment in their devices. At $60 per share, the market implied growth rate of the company (revenues) is less than 10%, as well as assuming a 300 400 basis point decline in operating margins. Given that Qualcomm is our 5th largest holding, we certainly believe that the market is over discounting the concerns chronicled above.

David Rolfe (Trades, Portfolio) is thechief investment officer of the St. Louis-based $1.3 billion investment management firm Wedgewood Partners Inc. Wedgewood's underlying equity investment philosophy is predicated on a strong belief that significant long-term wealth will be created by investing as "owners" in companies. Read more...

Brian Rogers (Trades, Portfolio) will step down as manager of the T. Rowe Price Equity Income Fund in October 2015 (PRFDX), he announced in June, but will remain the firm’s chairman and chief investment officer. He is still investing as usual up till that time, buying three new stocks in the second quarter. Read more...

Qualcomm Inc was incorporated in 1985 under the laws of the state of California. In 1991, it reincorporated in the state of Delaware. The Company develops & commercializes digital communication technology called CDMA (Code Division Multiple Access), & owns intellectual property applicable to products that implement any version of CDMA including patents, patent applications & trade secrets. It is also engaged in the development and commercialization of OFDMA (Orthogonal Frequency Division Multiple Access) -based technologies for which it owns substantial intellectual property. Its products principally consist of integrated circuits (also known as chips or chipsets) and system software used in mobile devices and in wireless networks. The Company also sells other products and services, which include: integrated circuits for use in wired devices, particularly broadband gateway equipment, desktop computers, televisions, set-top boxes and Blu-ray players; content enablement services to wireless operators; development, other services and related wireless communications products used by the United States government; location awareness and commerce services; and software and hardware development services. The Company conducts business primarily through four reportable segments: QCT, QTL, QWI and QSI. QCT (Qualcomm CDMA Technologies) Segment is a developer sale of certain wireless products, including, without limitation, products implementing CDMA2000, WCDMA, CDMA TDD (including TD-SCDMA), GSM/GPRS/EDGE and/or OFDMA (including LTE) standards and their derivatives. QWI (Qualcomm Wireless & Internet) Segment includes four divisions, namely Omnitracs Division which designs, manufactures and sells equipment, licenses software and provides services to its customers to manage their assets, products and workforce, QIS (Qualcomm Internet Services) Division that provides software products and content enablement services to wireless operators worldwide to support and accelerate the growth and advancement of wireless data products and services, QGOV (Qualcomm Government Technologies) Division that provides development and other services and related products involving wireless communications technologies to U.S. government agencies and their contractors. QRS (Qualcomm Retail Solutions) Division includes its retail services business, builds and manages software applications that enable certain mobile location-awareness and commerce services. QSI (Qualcomm Strategic Initiatives) Segment makes strategic investments that may open new or expand opportunities for its technologies, support the design and introduction of new products and services for voice and data communications or possess unique capabilities or technology. Nonreportable segments are comprised of its QMT (Qualcomm MEMS Technologies) division and other display, wireless technology and services initiatives that include, but are not limited to: low power consumption, high optical performance fl

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